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Baker Hughes Not Half-Baked

As we've already heard from the likes of Schlumberger(NYSE:SLB), Halliburton(NYSE:HAL), and Helmerich& Payne(NYSE:HP), drilling activity is going like gangbusters these days. Whether you're a major producer such as ExxonMobil(NYSE:XOM) or a small, plucky independent such as Ultra Petroleum(AMEX:UPL), you want to sink more wells and sell more oil and gas while prices are high.

That's sweet music for Baker Hughes(NYSE:BHI). The No. 3 player in oil and gas services, the company had a solid second quarter based on that strength in the drilling market.

Revenue climbed 18% in the quarter, and six out of the company's seven businesses posted double-digit year-over-year revenue growth. Whether it was drill bit rentals from Hughes Christensen or intelligent well systems for areas such as Ecuador and the Gulf of Mexico, demand for almost all manner of drilling and well services was solid.

Like other oil services companies, Baker Hughes is seeing substantial positive operating leverage these days. Operating margins climbed almost 4.0 points, and net income in the quarter grew 87%.

Breaking out the revenue a little further, Baker Hughes saw 25% growth in the drilling and evaluation business and 12.5% growth in the completion/production businesses. Likewise, operating profit growth was stronger in the former (69%) than in the latter (23%). Growth was generally strong around the world, though results in Russia were down for the quarter.

Perhaps not surprisingly, Baker Hughes raised its estimates again. While the business itself looks to be solid for at least another three years, the stock is likely to trade at least somewhat in sync with the day-to-day moves in crude oil prices.

Sure, the price of crude oil does affect drill/no-drill decisions from oil and gas companies, and that in turn feeds directly into Baker Hughes' bottom line. But just about everybody in the industry seems to think that oil would have to fall below $40 a barrel before drilling growth would be hurt and below $30 a barrel to really hurt new exploration and production efforts. That's a lot of leeway for Baker Hughes to continue to grow.